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Donated Pills Make Some Charities Look Too Good On Paper

GIK defenders say the accounting rules are flexible, ­confusing and in flux, and that nonprofits have acted in good faith. They worry, too, that low values might dis­courage cash donors. Certainly the GIK standards have been the subject of sometimes heated discussions within the ­nonprofit industry. The trend now is to use lower, but still puffed-up, values.

For example, earlier this year Oklahoma City-basedFeed the Children announced that its latest yearly GIK contributions dropped by $668 million—a stunning 60% fall—mostly due to its lowering of deworming valuation from $9.07 to 35 cents. But that’s still 1,600% above the world market price. No stranger to scandal, the charity, a pioneering longtime distributor of deworming pills using high values, is no longer among the country’s ten largest.

For many years World Vision, a large faith-based charity in Federal Way, Wash., was one of the most aggressive in valuing deworming pills. In 2009 it used $10.64—the same 53,000% markup used by Crista Ministries. After studying the issue and paying for outside data, it dropped the valuation for 2010 to $2 a pill—a mere 9,900% markup. Across the country, in Brunswick, Ga., MAP International, another big faith-based charity, says it valued the pills it distributed in its latest accounting period at $1 each, down from $10.58. But that’s still 4,900% above what they cost. In Phoenix, Food for the Hungry dropped its per-pill valuation from $10.64 to $1.54—53,000% to 7,600%.

In a promotional Web-posted video after the 2010 earthquake in Haiti, Bill Horan, head of Pat Robertson’s Operation Blessing International Relief & Development, stands in a truck parked in Port-au-Prince that he says holds 1 million mebendazole pills. “These things cost less than a nickel apiece,” he declares.But on its statements OBI claimed a much, much higher average value for deworming meds—$6.85 over seven years, we figure, a 34,000% markup over actual costs. That extra $300 million swelled OBI’s ­reported contributions by one-sixth to $2.2 billion and enhanced its calculated financial efficiency. An OBI spokesman insists that the 5 cents Horan was referring to was the cost of administering medicine “and not the cost of the pills themselves.” Still, in a policy change, OBI says for the time being it will assign no value to the pills on its financial statements.

Significantly, not every big charity plays the goose-the-financial-statement game. The New York City-based United States Fund for Unicef books the same deworming meds at only 2.6 cents. Direct Relief International of Santa Barbara, Calif. uses 3.2 cents. Kansas City’s Children International eschews donations and buys deworming meds on the open market for no more than 4 cents a pill and often much less. “More cost-effective and straightforward,” the charity says.

So how did 2-cent medicines become $10.64 pills or even $16.25 pills? The tale involves a pricing guide that lists deworming medicine at prices no one seems to pay.

Red Book, published by Physicians’ Desk Reference, a division of Thomson Reuters, is a database for drugs approved for use in the U.S. For each it includes something called “average wholesale price,” or AWP. These prices are supplied by manufacturers, and there is no requirement that they be accurate or even real. Indeed, Red Book explicitly states in a Web-posted disclaimer, “Thomson Reuters relies on the manufacturers to report the values.” Not clear enough? “Thomson Reuters does not perform any independent analysis to determine or calculate the actual AWP.” Still in doubt? “The manufacturer’s suggested AWP … does not necessarily reflect the actual AWP.” Small wonder nonprofit insiders openly joke AWP really stands for “Ain’t What’s Paid.”

Nevertheless, for years the nonprofit industry and its ­accountants eagerly used Red Book’s AWP as a basis for ­accounting statements. But to do so when it came to deworming medicine, they had to go one step further. For foreign use the standard mebendazole pill, the more popular of the two major deworming drugs, has 500 milligrams of medicine. But the maximum dosage approved for use within the U.S. is only 100mg. The lack of U.S. need for deworming medicine—parasites are not a big problem here—plus the fact that U.S. drug prices are among the world’s highest, resulted in top-dollar AWPs for the 100mg version. Listed per-pill AWP in Red Book have included these quotes: $10.64, $12.72 and $16.25.

There is no Red Book listing for 500mg mebendazole pills (although we’ve seen a Red Book printout that one pill purveyor doctored by changing “100mg” to “500mg”). Yet AWP values for 100mg mebendazole are used by many nonprofits. At least on their financial statements.

That highest AWP quote for 100mg mebendazole seems to be where Islamic Relief USA got its now-called-into-question $16.25 valuation for 500mg mebendazole. But there’s a lot more to this story. The charity says it was using the work product of Diana Sufian, a Santa Monica, Calif. nonprofit consultant who ran its GIK program for about six years. In 2010 she was paid $520,000—nearly three times the pay of the charity’s president, Abed Ayoub. Islamic Relief says it now has dispensed with her services. Contacted by FORBES, Sufian declined to comment on her status or operations but said she was not responsible for drug valuations.

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